Santa Cruz, the City Over the Hill, Works to Build Its Own Startup Culture

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If you’re visiting from the north, part of the delight of arriving in Santa Cruz—quite apart from its numerous attractions, both natural and man-made—is that you have survived the terrifying drive over the Santa Cruz Mountains on California State Route 17.

Engineers opened the narrow, sinuous, partial-access expressway in 1940 and they’ve been tinkering with it ever since, adding overpasses, center dividers, wider shoulders, and warning lights. Nothing has helped. As many as 200,000 vehicles careen around the Big Moody Curve and over Patchen Pass every day, often at insane speeds. Drivers spin out and crash with fatal regularity. It would cost at least $200 million to turn Highway 17 into a modern freeway with fewer curves, so it has never happened.

The treacherous road, and the 1,800-foot pass it traverses, constitute an enormous physical and psychological barrier. The drive from Intel headquarters in Santa Clara to downtown Santa Cruz is only 37 miles long, which means this sunny beach town is actually closer to the center of the Silicon Valley tech scene than either San Francisco or Berkeley. But no one ever speaks of Santa Cruz as part of the Bay Area. The same Sand Hill Road venture firms that regularly put millions into startups in San Francisco’s SoMa district are reluctant to invest in companies in Santa Cruz, which is only slightly farther away. And Santa Cruzans themselves talk about traveling “over the hill” as if it’s a trip to a different world.

Which it is, in many ways. While it’s close enough to exist in Silicon Valley’s shadow—serving as a bedroom community for thousands of people who commute to the Valley for work—it also has a unique and fiercely defended identity, and aspirations to stand alone as a business and technology hub. The dilemma for entrepreneurs and city leaders in Santa Cruz is that they would like to emulate Silicon Valley’s growth and success without giving up what’s special about their community—things like its culture of outdoor recreation and lefty individualism.

That will require major efforts on several fronts. To start, Santa Cruz needs to court more outside attention and investment, widen the pipeline of local students and professionals available to start or staff new companies, and give local entrepreneurs more reasons to work in town rather than going over the hill.

Santa Cruz's leafy downtown main street, Pacific Avenue, is home to numerous startups.

There are efforts underway to address all of those needs, and Santa Cruz has a core of passionate businesspeople, political leaders, and technologists who want to see it develop its own economic and cultural gravity field, separate from Silicon Valley’s. “I think of it as ‘linked but distinct,’” says Jeremy Neuner, a former economic development manager for the city, who now runs NextSpace, a chain of coworking centers founded in Santa Cruz in 2008. “Rather than trying to live in the shadow of Silicon Valley, or pick up scraps from Silicon Valley, I think this is a strong enough community with enough smart, innovative people that we can create—and I think we are creating—our own brand.”

But there’s still a lot of work ahead. I’ve been spending some time in Santa Cruz lately, talking to people from City Hall, the downtown business community, the university, and the city’s small but growing startup scene. What I’m seeing is a city that’s taking thoughtful and meaningful steps to become a more attractive place to grow a technology-related business, but that still faces big systemic challenges—some imposed from outside, some of its own making.

Why should any of this matter to people who live or work outside Santa Cruz? Because cities and regions around the country, and around the world, confront similar challenges. Santa Cruz is a microcosm for a very important question: what are the ingredients of a vibrant high-tech ecosystem? Even big cities like Boston and San Diego must continually examine whether they’re doing everything they can to support businesspeople, including technology entrepreneurs, who are rightly seen as key contributors to regional economic growth.

Not incidentally, this is one of the issues Xconomy was conceived to explore. My Santa Cruz field trip was a departure from my usual focus on San Francisco and Silicon Valley, but it yielded a fascinating view of a community coping with the curse—and the gift—of its geography. “No matter what branding campaign we choose,” says local startup event organizer Margaret Rosas, “we can’t get rid of the hill.”

Santa Cruz Is a Choice

Santa Cruz isn’t a cheap place to live—the average home goes for $627,000, according to Zillow—so most people who move there do so for a good reason. Unlike the string of faceless subdivisions along the 101 and 280 freeways in Silicon Valley, the city seems to attract people looking for a specific and idiosyncratic set of features, like a slower pace of life and proximity to surfing beaches.

“There are a lot of people who could be living or working almost anywhere in the country, but they choose to live here, for the quality of life and the access to recreational activities,” Neuner says. “It may not quite have the vibe and the hum and thrum of Silicon Valley, but that doesn’t mean that people here aren’t smart and educated.”

“You don’t end up in Santa Cruz by accident,” adds Rosas, who works as a community manager at a local business-intelligence startup called Looker. “It’s intentional. You intend to live in a place that has 295 days a year of beautiful weather. It has life balance. It is a great place to raise kids. And if you have to go over the hill, you are close enough to go once every few weeks.”

Of course, many residents go way more often than that, which is part of the city’s problem. Santa Cruz proper is home to 60,000 people, not counting the neighboring cities of Scotts Valley and Capitola, and there are estimates that nearly half of them—some 20,000 to 30,000 people—commute over Highway 17 to Silicon Valley every workday. Buses from Apple, Google, and Microsoft whisk Santa Cruz residents to their offices in Cupertino and Mountain View, exporting the city’s talent in what amounts to a massive, daily brain drain.

Many in the business community would like to see more of those people plying their skills and generating economic activity in Santa Cruz. “This community is filled with brilliant people,” says Andy Halliday, a serial entrepreneur who leads a mobile social networking startup called Erodr and has lived in Santa Cruz since 2001. “What I would want more than anything else is to create conditions to farm the best ideas here, instead of shipping them to Silicon Valley.”

The young companies that do set up shop in Santa Cruz choose the city for some of the same reasons as individual residents: they’re looking for a place where people think a little differently. Robert Singleton, a recent graduate of the University of California, Santa Cruz, is co-founder and chief marketing officer at Civinomics, a downtown startup building a Web-based suggestion box and citizen engagement forum for civic-improvement projects. He says Santa Cruz is a far better fit for his policy-minded company than Silicon Valley would be.

“With people who are working in Palo Alto, a lot of times it’s about, ‘How are we going to make money? What is the next big thing?’” Singleton says. “In Santa Cruz, it’s more like, ‘What problems do we really want to solve? How can we add some value to the community in which we live?’ There is a focus on generating a unique style of innovation, rather than on the next Angry Birds.”

And there’s another advantage to starting up in Santa Cruz: it’s an authentic place to find many of the amenities, from vegan cafeteria options to yoga studios to bike trails, that big companies try to simulate at their Silicon Valley campuses. “When I go to the Valley and I look at the tech companies, I feel like they are trying to create what we have in Santa Cruz,” says Rosas, whom I met outside Verve Coffee Roasters on Pacific Avenue, the city’s leafy, animated downtown hub. “You know how the Google campus has people riding their bikes around and eating beautiful organic food? Well, this is our campus.”

Unfortunately, investors don’t always buy these arguments when startups say they want to stay in Santa Cruz. I’ve talked to entrepreneurs and lawyers in the city who say they’ve repeatedly run into Sand Hill Road venture partners who refuse to invest in any startup that’s over a hill (or a bridge, for that matter—meaning startups in places like San Rafael and Berkeley and Fremont may be in the same boat).

Jason Book is the younger member of Book & Book, a father-and-son law firm in Santa Cruz that specializes in representing emerging companies. One Menlo Park-based venture partner, he says, “told us flat out that there was a time in venture investing where if the deal was more than 20 minutes away, partners wouldn’t even bring it to committee, it’s not going to get done. And he said there are plenty of VCs who still feel that way.”

Halliday, who’s surfing buddies with Book (I interviewed the pair on a seaside bluff in Capitola), shared a similar story. “One of the VCs we spoke to recently said, ‘We really want to track this [Erodr]. We think it has great promise. Reach out again when you have relocated your company over to the Valley.’”

For that reason and no other, Halliday says, Erodr is reluctantly considering a move to Los Gatos. Score one more for the brain drain.

Surfing, Cycling, and Sustainability

After hearing a couple of these stories, I began to ask venture investors I know whether they would have a similar reaction to a pitch from a Santa Cruz startup. No one said they’d rule out a Santa Cruz investment based on geography alone. But one useful insight into the venture mindset came from Norm Fogelsong, general partner at Institutional Venture Partners, a large and prestigious late-stage venture capital and growth equity firm in Menlo Park.

Fogelsong says he asks three questions whenever he’s evaluating companies outside Silicon Valley and other traditional startup clusters. “First, is there a unique expertise within the geography, whether it’s manufacturing or bioengineering or whatever? Second, are there examples of success that people can point to within that geography, so it creates a positive ecosystem and inspires entrepreneurs to emulate what others have done? And third, is there a sufficient number of qualified people within the geography that could help you grow a company, or are you limited in scale by the population?”

(Interestingly, IVP was one of the founding investors in Seagate Technology, the hard-disk manufacturer founded in Santa Cruz in 1979 by longtime resident Al Shugart. “They built a very nice company because the founders wanted to live there, and a lot of people moved there or were willing to do the commute,” Fogelsong says. “But one of the scaling issues was, could you get enough trucks over 17 to ship the product?” Seagate eventually moved to Cupertino.)

Fogelsong’s questions provide as good a framework as any for examining Santa Cruz’s prospects as an innovation hub. To the first question—what are the region’s unique areas of expertise?—virtually every Santa Cruzan would start off with the same answer: healthy living, outdoor sports, and recreation, especially surfing, skateboarding, biking, fishing, and whale watching. Santa Cruz Bicycles, Santa Cruz Skateboards, Santa Cruz Surfboards, and Arrow Surf are some of the city’s iconic brands in this sector. Every year, three million people visit the Santa Cruz Beach Boardwalk, California’s oldest amusement park. And the wetsuit was invented by longtime Santa Cruz resident Jack O’Neill, which may tell you all you need to know. “If you go to the coffee shop, people are talking about the weather and the surf, not ‘Did you hear about this or that IPO?’” says Rosas.

But it’s not just about boards and bikes: the CrossFit craze is the invention of Santa Cruz native Greg Glassman, and in 2012 the Golden State Warriors NBA franchise relocated its development-league team to Santa Cruz. Wilder Ranch State Park, a former dairy ranch on the west edge of town, boasts 34 miles of trails, and it’s not unusual to see a startup employee duck out for a lunchtime hike. “This is one of those rare cities that are surrounded by beautiful open space,” says Brent Haddad, an environmental engineer and former energy entrepreneur who now directs the Center for Entrepreneurship at UC Santa Cruz. “You can be on a path through the redwoods and minutes later you’re on a white, sandy beach.”

Then there’s the food. With its proximity to Watsonville and the Salinas Valley, one of California’s lushest farm valleys, Santa Cruz is home to some of the longest-running farmers’ markets in the country, and it is arguably the world capital of the organic/sustainable food movement and the “locavore” concept (eating food that’s locally produced). The Center for Agroecology & Sustainable Food Systems at UC Santa Cruz “basically invented organic farming,” according to Neuner. Odwalla, the fruit juice and smoothie giant now owned by Coca-Cola, was founded in Santa Cruz in 1980, and the city is also home to the Coalition of California Organic Farms.

The university itself counts as one of Santa Cruz’s biggest assets—and by far its largest employer. In addition to its agricultural work, UC Santa Cruz is a leader in areas like marine biology, genomics, and gaming. Bioinformatician David Haussler led a team that completed the first sequences in the Human Genome Project, and the UCSC Genome Browser developed in Haussler’s lab is essentially the Wikipedia of genomics—an open-source repository of gene sequence data across dozens of species. The crown jewel of the university’s young Baskin School of Engineering is the Expressive Intelligence Studio, which is routinely ranked as one of the world’s top graduate game design programs.

Local specialties like surfboard manufacturing and organic food may not sound particularly high-tech. But you might be surprised how much computer-aided design and material science know-how goes into a surfboard these days—and Neuner thinks there’s room for technology entrepreneurs to use e-commerce, mobile, and other digital channels to spread the Santa Cruz brand to the world.

“When people think about Silicon Valley, they think technology, and that’s great,” he says. “But here you can think technology, sports, recreation, tourism, marine sciences, organic farming, and the locavore movement. All of that is what makes a rich opportunity for us to stand out, not just against Silicon Valley but against the world.”

In Part 2 of this story, we answer Fogelsong’s second question: how strong is Santa Cruz’s legacy of successful companies and entrepreneurs? Part 3, coming August 1, will look at the third question, about the city’s supply of talent, as well as efforts to reverse perceptions that Santa Cruz is anti-business.